What would an "interim" Brexit deal look like?

Opinion piece (Prospect)
26 October 2016

Once Theresa May triggers Article 50 of the Treaty of the European Union, the UK will have two years to negotiate its exit from the EU. But it will take much longer than this to broker a trade deal between Britain and the EU to replace Single Market membership. As a result, there will be several years between Britain leaving the EU and a free trade agreement, or a Swiss-type bundle of sectoral agreements, coming into effect. For example, the EU-Canada trade agreement took seven years to negotiate and could take many more years to ratify in national parliaments—if the Belgian region of Wallonia has not completely torpedoed the deal this week by refusing to ratify it. And the obstacles in the path of a Swiss-type deal are, if anything, even bigger.

This gap could be covered by an interim deal. The alternative would be for Britain to leave the EU without any deal in place, and trade with the EU under WTO rules. Notwithstanding the bravado of some UK ministers, who argue that such an outcome would not be so bad, the British government wants to avoid this outcome. After all, it would mean tariffs on UK goods exports as well as of a loss of access to the EU services markets.

What would an interim deal look like? It would closely resemble membership of the European Economic Area (EEA). Members of the EEA are basically like non-voting members of the EU: they are in the EU single market but cannot vote on EU rules, must comply with free movement of labour and pay into the EU budget.

How would this interim period come to an end? Britain’s status could either evolve during this interim period, with the country’s Single Market rights being rescinded, to be replaced with sectoral agreements, along similar lines to the ones agreed between the EU and Switzerland. Alternatively, and probably more likely, the UK would move in one step from the interim status to a free trade agreement, along the lines of the EU-Canada trade deal.

How difficult will it be to negotiate an interim deal? It is possible, but far from straightforward. Because the interim status would be more favourable to Britain than the final deal, the rest of the EU will likely conclude that the interim status might become the final status as Britain wakes up to the costs of leaving altogether. They are thus likely to drive a hard bargain on the interim agreement. One solution could be to put a time limit on how long Britain can enjoy such interim status.

How important is an interim agreement economically? If brokering interim status means that the UK avoids a period of time trading with the EU under WTO rules, it could have a significant economic impact. It would reduce the likelihood of the UK facing a major—rather than gradual—economic shock and potential sudden stop to capital inflows as foreigners get skittish about financing the country’s large trade deficit. But because the interim agreement cannot last forever and because the bespoke EU-UK deal might never be ratified by all 27 member-states, the UK could still find itself trading with the EU under WTO rules after the interim period.

In the long-term, the economic impact of any interim agreement is unlikely to be that great. After all, firms will make their investment decisions with reference to what they expect Britain’s permanent settlement with the EU will be, not the interim status. And if, as looks likely, that final agreement will be pretty limited—free trade in goods but very limited access to EU services markets—investment in Britain will suffer, along with productivity growth and UK living standards.

Simon Tilford is deputy director at the Centre for European Reform.